Investors are eagerly anticipating the release of the January Consumer Price Index (CPI) report, which is set for Tuesday, February 12 at 8:30 a.m. EST. This data will provide insight into the Federal Reserve’s efforts to combat inflation, and may influence market sentiment.
There has been speculation that the Fed may postpone a rate cut originally planned for March, and instead implement it in May or June due to unforeseen circumstances. Given this possibility, the upcoming CPI report is especially significant in shaping market expectations.
Here’s what to expect from this week’s key data release:
Consumer Price Index (CPI)
According to forecasts from FactSet, the CPI is projected to rise by 0.2% in January, matching the increase seen in December. The Core CPI, which excludes volatile food and energy prices, is also expected to rise by 0.3%, mirroring the previous month’s uptick. On a year-over-year basis, CPI is projected to increase by 2.9%, slightly lower than December’s 3.4%. Core CPI is also anticipated to show a decrease in year-over-year growth, from 3.9% in December to 3.7% in January.
Katie Nixon, Chief Investment Officer at Northern Trust Wealth Management, predicts that the CPI will continue to trend in a positive direction, but at a slower pace compared to the decline in PCE inflation, which is the Fed’s preferred measure.
In the cryptocurrency market, concerns about inflation and monetary policy often lead investors to seek alternative assets such as Bitcoin (BTC) and other cryptocurrencies. Bitcoin serves as a hedge against inflation, making it an attractive option if inflation were to rise. A higher-than-expected increase in CPI could potentially drive more investors towards the crypto market.
Producer Price Index (PPI)
Given the expected increase in CPI and Core CPI, it is likely that the PPI will also see an uptick, as these measures are correlated. However, December’s PPI actually showed a decrease of 0.1%, despite concerns about inflation. On a year-over-year basis, the PPI increased by 1%, which is a significant milestone in the fight against inflation. If the PPI follows a similar trend in January, it could help to further minimize inflationary pressure and limit the shift towards volatile assets like Bitcoin and other cryptocurrencies.
Housing and Rent Expenses
Nixon points out that while inflation is generally declining, certain components, such as housing costs and services, tend to change more slowly due to their “sticky” nature. Jeffrey Roach, Chief Economist at LPL Financial, agrees and highlights the lag in categories like services and rent prices as a factor contributing to the complexity of inflation dynamics. However, analysts expect to see a decrease in rent inflation in the coming months.
On the other hand, prices for goods have been falling rapidly enough to offset inflation from services, creating a “push/pull” dynamic.
The Role of the Labor Market in Inflationary Pressure
The strength of the labor market presents challenges in moderating inflation. Real wage gains and strong employment figures continue to drive consumer spending, which could put upward pressure on prices. Last week’s strong jobs report serves as a reminder that the “last mile” of inflation remains difficult to control.
Potential Risks to Inflation Outlook
There are potential inflationary pressures from rising manufacturing costs and supply chain disruptions, particularly in the Red Sea region. These challenges may complicate the Fed’s decision-making process as it evaluates the potential timing of rate cuts.
Fed Rate Cut or Pause?
According to the CME FedWatch Tool, there is a 52% chance of a rate cut in May and a 39% chance of rates remaining steady. Federal Reserve Chair Jerome Powell has emphasized the need for more evidence of sustained inflation moderation before considering rate cuts, and has stressed the importance of closely monitoring economic data.
There is also speculation that the Fed may postpone the rate cut to the May-June period due to various factors and their potential impact on the markets. As expectations for a potential rate cut fluctuate, cryptocurrency prices may experience increased volatility as traders react to shifting macroeconomic trends.
